(Bloomberg) -- Financial stability in Germany, Europe’s largest economy, has taken a substantial turn for the worse this year, triggering warnings from the Bundesbank.

Banks, insurers and investment funds have already recorded losses as markets adapt to deteriorating growth prospects, stubbornly high inflation and rising interest-rate and risk premiums, Germany’s central bank said in its annual Financial Stability Report.

“A worsening energy crisis, a sharp economic slump and abruptly rising market interest rates could put the German financial system under considerable pressure,” the Bundesbank said Thursday. “Rising costs are limiting the financial leeway of households and enterprises. Future credit risks are increasing as a result.”

While banks still consider credit risks as “fairly low,” the institution said many assumptions made in the past when granting loans “are likely to prove to be overly optimistic.”

“Financial institutions should assess the impact of adverse scenarios,” said Bundesbank Executive Board member Joachim Wuermeling, who’s in charge of banking supervision. “Given the high uncertainty, they should engage in prudent risk provisioning and exercise caution when distributing profits.”

The European Central Bank issued similar warnings last week when it published its Financial Stability Review. It sees risks that record inflation hurts people’s ability to service debts, with waning economic momentum threatening corporate profits and fiscal stimulus stretching governments’ finances.

Speaking last week at a conference in Frankfurt, several top German bankers including Commerzbank AG Chief Financial Officer Bettina Orlopp questioned whether the time is right to enact the new rainy-day capital buffer, given the economy’s prospects have already become gloomier.

But speaking on Bloomberg TV, Bundesbank Vice President Claudia Buch pushed back against that idea, saying it’s important to make the financial system more robust. 

“It’s now even more important that macro risks have increased that we increase resilience in the system, that banks maintain the buffers that they have and that they also take precautionary measures,” she said. “Credit has been increasing this year, so we don’t see a reversal of the financial cycle. In that sense we think that the buffers are still well justified.”

--With assistance from Nicholas Comfort.

(Updates with interview with Bundesbank’s Buch in last two paragraphs.)

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